International Journal of Scientific & Engineering Research, Volume 7, Issue ŗŘǰȱŽŒŽ–‹Ž›ȬŘŖŗŜȱ 1248

ISSN 2229-5518

An Impact of good & Service Tax on Indian textile

industry
Tanushree Gupta
Department of management , APS Rewa University Rewa, India

Abstract— Goods and Services tax (GST) constitutes the last mile of a long journey of reforms of indirect taxes in India. GST will replace a number of
central and state taxes. The important taxes that may be subsumed in GST are cenvat and service tax at the central level and State VAT/sales tax, central
sales tax, and entry tax at the state level along with a number of additional or special duties and cesses and surcharges. The final design of the GST and
the related constitutional amendment are yet to be finalized. However, the impact of GST on the textile sector will be quite significant. GST will
fundamentally change the way the textile sector is presently taxed in India. Taxation of textile sector is presently opaque and non-neutral across its
various segments. This study examines the implications of GST for the Indian textile industry. It estimates the revenue neutral rates for the relevant
textile segments under the GST and highlights the implications of GST for the growth, employment and export potential of the industry. It also highlights
changes required in the subsidy and support policies of the government as and when the GST regime replaces the current regime of indirect taxes.

Index Terms— Goods & service tax, textile industry, Excise duty

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1 INTRODUCTION
Goods and Services tax (GST) is one hundred and first amendment of requirements. This decentralized sector is comprised of the three major

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the constitution of India. Taxation of textile sector is not transparent in
its various segments. Many textile outputs are either exempt under the
central and state tax regimes or are subjected to relatively low tax rates.
Most of the indirect taxes fall on inputs, both goods and services, and
therefore remain hidden. On the whole, the textile sector is lightly taxed
and extensively subsidized. Textile exports are supported through pay-
ments of un-rebated taxes on textile inputs and other subsidies. So the
current impact of GST on textile industry is negative, considering the
fact that it is the second largest textile industry in the world after China.
Apart from providing one of the basic necessities of life i.e. cloth. The
textile industry contributes about 14% to the country's industrial output.
After agriculture this industry provides employment to maximum num-
ber of people in India employing 35 million people. Besides, another 46
million people are engaged in allied activities.
Textile Industry contributes around 4% of GDP, 9% of excise collec-
tions, 18% of employment in industrial sector, and has 16 % share in the
country’s export. India is the largest exporter of yarn in the international
market and has a share of 25% in world cotton yarn export market. India
contributes for 12% of the world’s production of textile fibers and yarn.
Classification of Indian Textile Industry
The textile industry can be broadly classified into two categories, the or-
ganized mill sector and the unorganized decentralized sector. The orga-
nized sector of the textile industry represents the mills. It could be a
spinning mill or a composite mill. Composite mill is one where the spin-
ning, weaving and processing facilities are carried out under one roof.
The decentralized sector is engaged mainly in the weaving activity,
which makes it heavily dependent on the organized sector for their yarn
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segments that is power loom, handloom and hosiery. In addition to the
above, there are readymade garments, khadi as well as carpet manufac-
turing units in the decentralized sector. Thus textile industry classifica-
tion is as follows:-
1. Organized sector
A) Spinning mills or composite mills
2. Unorganized decentralized sector
A) Power loom segment
B) Handloom segment
c) Hosiery segment
D) Khadi& Carpet manufacturing segment
Organized mills
The organized mill sector contributes around 10% of the fabric produc-
tion in the country. Mills which comprise both spinning and weaving are
called composite mills.
Power loom
This sector comes under unorganized sector and contributes 55 % of the
total cloth production of the country. It is capital intensive and is decen-
tralized. Indian power loom fabric is competing successfully in global
market. The Power loom sector has been contributing about 55% to total
production of entire textile industry over last decade, at approximately
16,000 sq. meters per year.
Handloom sector
This sector is the largest economic activity after agriculture and provides
direct and indirect employment to more than 45 lakh weavers. It contrib-
utes nearly 23 % of total cloth production. Indian handloom is a part of
heritage. India's genius is known to the world through its handspun cloth.
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ISSN 2229-5518

Silk, Jute, Cotton and Khadi are the major areas in Handloom sector.
Garments& Hosiery
Indian apparel industry has a great potential and is a major foreign ex-
change earner. Indian apparels are high in fashion and hence are in great
demand abroad. There are around 30,000 manufacturing units in the
country, but these are small and fragmented. They employ around 3 mil-
lion people and earn Rs. 18,000 crores by exports.
The GST is a consolidated tax based on a uniform rate of tax fixed for
both goods and services and it is payable at the final point of consump-
tion. At each stage of sale or purchase in the supply chain, this tax is col-
lected on value-added goods and services, through a tax credit mecha -
nism. Research Methodology
The study contains exploratory research design and Data collection is
done by secondary sources including newspaper, journals and various

Literature review government websites.

Findings& Discussion
In the year 2000, for the first time the idea of initiating the GST was
Major changes in tax rates specific to textile inputs/outputs:
made by the then BJP Government under the leadership of AtalBehari
1. Excise duty on fabrics made from cotton alone increased from 5% to
Vajpayee. An empowered committee was also formed for that, headed by
6%
AsimDasgupta (the then Finance Minister of the West Bengal Govern-
2. Excise duty on synthetic textile inputs such as polyester and viscose
ment). The committee was formed to design the model of the GST and at
also increased to 12%
the same time inspect the preparation of the IT department for its rollout.
3. Abatement applicable to branded ready-made garments increased
In 2011, the previous United Progressive Alliance (UPA) Government
from 55% to 70% of the Retail Sale Price.
also introduced a Constitution Amendment Bill to facilitate the introduc-
The overall impact of GST on the textile industry and consumers will de-
tion of the GST in the LokSabha but it was rejected by many States.
pend on how the available policy options are exercised in implementing

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Now in year 2016 this bill got green signal under the umbrella of Modi
GST in relation to textiles. There is three segments that would be in a
government.
relatively disadvantageous position are:
The GST is basically an indirect tax that brings most of the taxes im-
1. Khadi and Handlooms
posed on most goods and services, on manufacture, sale and consump-
2. Cotton textiles
tion of goods and services, under a single domain at the national level. In
3. Carpet weaving.
the present system, taxes are levied separately on goods and services.
The main policy options, which may be considered for specific segments
The GST is a consolidated tax based on a uniform rate of tax fixed for
or all segments of textiles, are as follows:
both goods and services and it is payable at the final point of consump-
A) Zero rating-Zero rating involves an effective mechanism for refunds
tion. At each stage of sale or purchase in the supply chain, this tax is col-
and even advanced tax jurisdictions find it difficult to implement it. It
lected on value-added goods and services, through a tax credit mecha -
should be recognized that zero rating will not cover producers below
nism.
threshold levels. On the other hand, it may lead to rush for registration
The model of GST and the rate
with the central and state governments to claim the refunds. It may also
A dual GST system is planned to be implemented in India as proposed
open up an avenue for claims that may be fraudulent.
by the Empowered Committee under which the GST will be divided into
B) Exemption-Exemption The second option is exemption for selected
two parts:
segments. Exemption does not mean no incidence of tax since it results
Central Goods and Services Tax (CGST)
in blocked input taxes. It may result in higher tax incidence due to
State Goods and Services Tax (SGST)
blocked input taxes and tax cascading. The tax impact of exemption be-
The Goods and Services Tax (GST) is said to replace all indirect taxes
comes dependent on the nature of supply chain. For example, vertical in-
levied on goods and services by the Government, both Central and
tegration may reduce the magnitude of block input taxes. This option is
States. The GST will consolidate all State economies. It will be one of
also not recommended as it distorts resource allocation choices. It shifts
the biggest taxation reforms to take place in India. The GST will make a
tax burden from consumption to production. Exemption to fabrics leads
significant breakthrough paving way for an all-inclusive indirect tax re-
to pressure from industry for exemption from production inputs as well.
form in the country.
This leads to complexities in the administration of tax. In general, selec-
The GST is basically an indirect tax that brings most of the taxes im-
tive exemptions detract from the supply chain neutrality as well as fiber
posed on most goods and services, on manufacture, sale and consump-
neutrality in the textile sector. Under the GST scheme, area-based ex-
tion of goods and services, under a single domain at the national level. In
emptions will be discontinued.
the present system, taxes are levied separately on goods and services.
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International Journal of Scientific & Engineering Research, Volume 7, Issue ŗŘǰȱŽŒŽ–‹Ž›ȬŘŖŗŜȱ
ISSN 2229-5518
C) Lower rate of tax -Lower rate of tax The next option is to subject the
textile segments to the lower rate of tax, which may be possible in a dual
rate regime. This is an advisable option if the government chooses to
have a lower GST rate along with a standard rate. It is also suggest that
all textile fabric categories (e.g., khadi, cotton, synthetic, and ready-
made garments) should be in the same category to avoid classification
disputes and maintain fibre neutrality. However, the scope of lower tax
rate needs to be determined. There will be issues if inputs are taxable at
higher rate and outputs are taxable at the lower rate. It gives rise to is -
sues relating to refunds and requires monitoring of refunds.
D) Standard rate of tax with appropriate subsidies-Standard rate of tax
with appropriate subsidies another option is to apply the standard rate of
tax with appropriate subsidies. If the country goes for a single rate
regime, this option may be recommended in preference to zero-rating
and exemption even if there is a net positive effect on prices. However,
the price effect of GST will depend on the actual level of the standard
GST rate. A GST regime with a standard rate results in a clean tax sys -
tem. It achieves production efficiency, which is the key concern as op-
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posed to the regressively of the tax system. It can be accompanied by an
appropriate subsidy regime to support weakest segments of the textile in-
dustry. In the case of textiles, additional resources will be released to fi-
nance such subsidies as many of the existing support schemes will not be
required once zero-rating of exports becomes integral to the tax system
as under GST.
Policy Options for Specific Textile Segments
Khadi and Handlooms -The handloom industry plays an important role
in the country’s economy, being one of the largest economic activities
and providing direct employment to over 65 lakh people engaged in
weaving and allied activities. The sector is a substantial contributor to
the overall fabric production in India. The fabric production from hand-
loom sector was 6.9 billion square meters in the year 2011-12, forming
11% of the country’s total fabric production. Majority of this production
is consumed in the domestic market and a minor percentage of overall
production gets exported. Handloom products have always faced compe-
tition from power loom sector, where the cost of production is much
lower. Slowly handloom industry has moved towards production of more
value added products, where the price of the product is judged more by
its aesthetic and heritage value. Silk Saree from Varanasi, scarf from
Barabanki, home furnishing from Bijnore, shawls from Kullu, ikat sari
from Sonepur and Bargarh, cotton saree from Chanderi are few such ex-
amples of value added handloom products.
Handloom products are value added
products and do not perceive any considerable market shrinkage of hand-
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1250
loom product. Zero rating can be one option to avoid increase of tax bur-
den on handloom products. Zero rating is possible only if all input taxes
are refunded. But it will be quite difficult to manage its administrative
process. The zero rating policy option has been tried earlier by different
jurisdictions, who have found it difficult to administer and monitor input
tax refunds. The other option is to subject it to the standard GST rate
while facilitating the handloom weaving process through different inter-
ventions, which will help in decreasing the cost of production or increas-
ing the value of product.
Suggestions
Some of the possible suggestions are mentioned below:-
1. Raw material bank: Yarn constitutes more than 60% of the overall cost
of handloom products. Typically major yarn spinners are not located
within or near the handloom clusters and they do not sell yarn directly to
the weaver/master weaver/cooperatives. There are a number of agents in-
volved in the process of delivering the yarn from mill to weaver, which
increases the price of yarn and sometimes creates artificial shortage of
raw material availability, which in turn increases the price of yarn. De-
velopment of raw material (yarn) bank at a cluster level will not only en -
sure continuous supply of raw material but will also help in reducing the
price of yarn.
2. Supply of handloom parts at subsidized rate: Many times handloom
weavers can’t change the defective handloom parts due to its high price.
This reduces the efficiency level of the handloom weavers and also dete-
riorates the quality of the products. Supply of handloom parts at subsi-
dized rate will help handloom weavers to improve their efficiency, which
will help in reduction of cost of production. Also, an improvement in
quality will enable the handloom weavers to charge a premium for their
product.
3. Improved Dyeing facility: Color fastness is the most common quality
problem with handloom products. Many consumers hesitate to purchase
handloom products due to this problem. Usage of age old dyeing facility
is the reason behind such quality problem. Installation of better dyeing
technology at cluster level will help in solving this quality issue, which
will help in increasing the demand of handloom products and its price as
well.
4. Product & design development: Supporting handloom weavers in
product and design development will help them in reducing the cost of
manufacturing and developing higher value added products, which can
be sold with higher premium. This facility can be provided to handloom
weavers through training or opening facility Centre at the cluster level. It
is important to mention here that Ministry of Textiles is implementing
many such interventions through different schemes. The scale and cover-
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ISSN 2229-5518

age of those interventions might be expanded to improve its effect on

overall handloom industry.
References
1.http://www.thehindu.com/business/Economy/new-ser-
vice-tax-regime-comes-into-effectfrom-sunday/article3589492.ece
2.http://www.thehindu.com/business/Industry/agricultural-commodi-
ty-prices-to-rise-postgst-kelkar/article5007105.ece
3.http://www.thehindu.com/business/Industry/cabinet-nod-for-amended-
bill/article6701784.ece
4.http://www.thehindu.com/business/Industry/gst-has-a-good-probabili-
ty-in-tax-horizonparthasarathi-shome/article4535047.ece
5.http://www.thehindu.com/business/Industry/gst-will-benefit-food-pro-
cessing-industrypawar/article5478407.ece

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